Technology Trends in P2P and Tax Automation

MS. SCHWABENBAUER:  Hi, I’m Kristen Schwabenbauer.  Welcome to Tax Today, a Vertex Podcast series.  On today’s episode we’ll be exploring trends and P2P and tax to keep in mind when automating with our repeat contributor, Mike Bernard, Vertex’s chief taxation officer.  Mike, thanks for joining us.  
    We also have Vertex’s David Deputy.  He is our director or strategic development in emerging markets.  His current responsibilities include focusing on the application of our latest technologies to problems in tax and regulatory compliance.  As a leader in the Vertex innovation lab, he brings prior experience in the finance and enterprise software areas through work with both large enterprise software firms and smaller analytic focused startups.  
Today we’re spending time discussing some technology trends.  But before we jump into that topic, Mike, if you can give us some introductory remarks, we would appreciate that.  
    MR. BERNARD:  Thanks, Kristen.  It’s good to be back on the podcast again.  And, as you know, we’ve talked a lot of thing -- about a lot of different areas as it relates to the intersection of procurement and tax.  Today we’re gonna focus a little bit more on technologies.  And so, I have a couple of things that I wanted to mention just before we kind of get there.  The use of the technologies are really great today.  And they’ve advanced greatly over the last several years.  But what they really do is they produce some very great benefits up over the top as it relates to just the procurement group and also tax itself.  
    As you know, Kristen, we’ve talked earlier about governance.  And one of the things that we’re really talking about in all of this is accuracy.  Accuracy around, actually procuring something and paying the proper amount of tax or paying no tax.  Or for it to actually be exempt.  
One of the things that you can do is actually use some of these technologies to actually effectuate better and more accurate taxation around the products and services that a company’s purchasing.  And so, when you do that, it also leads to a better financial statement results.  In other words, you don’t have to post up reserves, because now you know that the accuracy of what you’re purchasing is accurate.  And so, it can be -- and so you don’t have to set up reserves around that.  So that’s a big benefit from it.
    The second thing it does, and we’ve seen this over the past several months with the pandemic, it actually preserves cash.  So, what it makes sure that happens is that the actual products and services that are being procured, actually the least amount of cash or the proper amount of cash is actually being used to purchase those services and products.  
And, lastly, what it also does -- and what I’ve seen in my own time in industry, it gives the procurement process a chance to actually update their master datafiles.  And what I mean by that is, by doing -- by utilizing some of these technologies, you can actually move your files from say maybe 20,000 different suppliers, if you’re -- if that’s what it was previously, maybe down to five or 10,000.  Something like that.  So actually, you get a more accurate master data file.  
And with the smaller file and a more accurate file, obviously, you don’t have to spend as much time being concerned about a larger set of data that you actually have to tax categorize.  So, with those comments, I’ll turn this back to you. 
    MS. SCHWABENBAUER:  Fabulous, Mike.  Thank you.  David, thanks for joining us.  I appreciate you taking the time.  
    MR. DEPUTY:  Thank you, Kristin.  Happy to be here. 
MS. SCHWABENBAUER:  Great.  Fabulous. David, let’s start with the current state of technology at Vertex before we start, you know, diving into where we’re going.  
MR. DEPUTY:  Sure.  You know, Kristen, we’re a tax vender focused primarily on sales use and VAT taxes.  So that’s the lens through which we view the world.  And the solutions we offer have largely solved the problem of computing the right tax.  We can determine based upon a variety of information, like the ship to, the ship from, the sell to in order to determine the right jurisdiction of taxation.  
We can drill down from state, county, city, and address them all simultaneously.  We can keep you current from our latest changes in rates and rules automatically.  We could help you file your returns or even do it for you through our outsourced, you know, returns managed services.  
But all this capability is dependent upon the correct identification of tax category to which item you sell maps.  In this case, the items that you purchase, that information may be coming from your vendors.  And today, the categorization is a manual process.  When done largely in the procurement area by a personnel who are not trained to the intricacies of tax categorization.  They’re just not tax people.  And that’s a critical link in the chain of taxation.  And one that can be material.  
You know, rate differences can, you know, be significant in audit.  You know, things you don’t think about, like, categories like a smoke detector.  If you classify it as power equipment rather than smoke detector, there’s an average across the U.S. difference of two percent in that rate.  So, things like that can accumulate and put you at risk of audit.  And, you know, you have to build reserves, as Mike talked about.  
Now, with state and local governments more pressed than ever to raise revenues with the economic slowdown, we’re right in the middle of, we all know audit scrutiny’s gonna increased.  You know, this is probably not gonna go away.  When something goes up, it tends to stick in the tax world.  So, we know there are errors in classification being made.  And we also know that our past efforts have -- you know, I’m trying to keep the procurement people current and trained in tax.  And how to classify all the items that we’re procuring is really hard.  Those efforts are sometimes successful.  Then you have turnover.  
So that’s kind of the state of where we’re at.  There’s this critical link in the chain that’s a manual process that Vertex is looking at.  
MS. SCHWABENBAUER:  That makes perfect sense.  And that’s really the whole idea behind this podcast series is to get to procurement folks.  Say, “Hey.  We know you have a problem.  Hey, but we can help.”  And raise our hands.  And I think that -- so what you had summarized there really helps take us -- takes us through, you know, the specifics of what we’re looking at and what the problems are.  And, you know, employee turnover and the manualness of all of this right now and how we might be able to help. 
So how do we -- how do we address the risk?  What’s Vertex’s plan? 
MR. DEPUTY:  Well, that’s a great question.  We believe in automation.  We believe technology can help automate processes that are manual.  There still needs to be a human element.  So, the question we took on with a set of, you know, human centered research, some technology development.  And then taking that out with clients into pilot projects was around the impact we could have on the classification accuracy and the amount of effort if we were able to automate it or automate a good part of it.  
So as the leader in tax automation, you know, this is kind of addressing the final frontier.  It’s a natural step for us.  What we found was that we could have a big impact.  Not just on the accuracy, but also in significantly removing the time and manual effort involved.  So, in some cases, up to an 80 percent reduction in both the time spent and the errors working with some of the clients in these pilots. 
MS. SCHWABENBAUER:  Oh, that’s great.  That’s fantastic.  So how do we do it?
MR. DEPUTY:  Well, we use advanced machine learning technology.  The type of stuff that’s, you know, your social media feeds are curated by these machine learning algorithms.  So, we’re taking that same technology, and we taught it how to categorize goods and services for tax.  And we tested it with our clients to make sure.  And we even have one client in production today.  
What they found -- what these clients found was that it performed better than expected.  In some cases, hitting 80 percent right out of the box.  Right out of the gate.  So now we’re working to understand how clients can best take advantage of this new capability. 
MS. SCHWABENBAUER:  Great.  So, what -- talk to us now.  What are some of the specific questions that you’re looking at with them?
MR. DEPUTY:  Well, there’s a lot of ‘em.  So, it’s one thing to have a technology, it’s another to have -- you know, provide value in your business process.  So, for example, do -- would you prefer a simple service where you send the item information and get back the categories for tax.  Or would you prefer a software system that you can integrate into your operations?  Your existing workflow.  How would it fit into that existing workflow?  
You know, how can it be leveraged for analytics?  Can you, you know, use it for outlier identification?  Reverse audits and to clean up that master file that Mike talked about?  Right.  How can you teach the specifics of your business?  So, it’s one thing to have, you know, a general purpose, but you may have specific characteristics for your business that certain ways you want to classify or how you want to operationalize it.  
And then, if you choose to deploy it, how do you get your people comfortable with the proposition of basically a robo advisor working with them to help them do their work.  You know, that’s that human element we talked about.  Are there process changes that you would consider since this technology’s available?  Should you change your overall process to take better advantage of it?  Right.  
Should you push this capability out to the frontline procurement analyst doing the initial entry of the information?  Or use it as a review in correction function within tax after it’s been done?  Right.  Many other questions like when and where do you want to have the humans review the results?  Is it only when the -- there’s not a lot of confidence?  Because, you know, you could see for each item the confidence and the prediction.  Right.  So where does the human come in?  And can you also use it for things like UNSPSC encoding and tagging and tax classification based on UNSPSC codes?  
And a big one is, does it make sense for industries to gather together and share best practices through this machine learning capability.  So, to build a collective model.  And it could be done in ways where you don’t have to share your underlying data.  So that’s a big one for us,  you know.  There’s a lot of other questions, but that’s top of our mind.  Things like that we’re exploring with the clients. 
MS. SCHWABENBAUER:  Oh, that’s really cool.  That’s really cool.  I think -- and it makes a lot of sense.  I love to see us thinking like this and moving forward like this.  The way that I see things, at least from my perspective, is that I think we’re only just starting, especially with procurement tax and procurement.  And it goes vendor by vendor as far as like Coupa, or Ariba, or SAP, or Oracle what exactly you can do.  And there’s -- we’ve got lots of checks and balances, potentially if you have a lot of functionality and they’re more robust.  Or they may be very limited.  
But when I look at that, I keep saying to people, I’m like, “Don’t -- don’t let this stop you.  You might not have all the tech -- the functionality right now.  We’re gonna build it together.  And it’s gonna get better, and better, and better.”  And I think this is a lot of what you’re doing.  And you’re on the frontend of -- you know, frontend of it.  
We’re kind of behind the scenes right now in just doing the tactical stuff and having those conversations and trying to push, you know, companies to expand their tax APIs.  ‘Cause I think from a procurement prospective there’s a ton more with regards to tax that we can automate.  I know there is.  And we often talk during this podcast about, you know, touchless AP.  And is that even possible?  So, with this new technology and this -- and where we’re moving, does this, by any chance, replace humans?
MR. DEPUTY:  I don’t think so.  I mean, it’s a new frontier where machines are learning from what we do.  And potentially from what others do.  But they’re really becoming advisors.  Capable of helping us make decisions.  You know, at all levels.  Here we’re talking about a -- you know, a product classification for tax level.  But there’s -- it’s all natural that these capabilities applied to the decisions made in supply chain and procurement specialists.  Even in the tax area.  
So, I think it’s key that other general machine learning and AI projects that, you know, we use as consumers are integrating the other business applications.  This one’s being curated by Vertex.  So, you know, we’re responsible for making sure it works.  And, you know, we have this vast experience and expanse of knowledge in indirect tax.  
The good news is the early results are shown real promise.  We’ve got a client in production.  They’re seeing amazing results.  So, we’re eager to work with the next group to make sure we understand how this becomes operationalized in their environment under their specific circumstances.  So, we invite anyone who’s interested in learning more.  And, you know, sharing with us.  And maybe even experiencing the benefits of this to get in touch with us. 
MS. SCHWABENBAUER:  That’s great.  Mike. Do you want to jump in and have any closing remarks? 
MR. BERNARD:  I do Kristen.  I mean, I think one of the things is someone who is in industry for so long in the corporate environment, I’m really enthused by these new kinds of technologies for several reasons.  I think, first and foremost, what I see these technologies as fitting into is the technology roadmap that a lot of corporate tax departments already have.  They may have outsourcing going on.  They may have cloud-based application systems.  They may have other third parties that lend themselves to their compliance and planning functions.  But what this function really -- or what these technologies really actually do is as -- is that they actually enable a tax department become more efficient and to serve other functions within their corporate environment at a very, much more leveraged level.  
And so, what David’s talking about is not only does tax get enthused about these things, but there’s other functions within the corporate environment, they get enthused about them.  For example, your test auditors, they’re already using these types of technologies for their (inaudible 13:34) testing.  Where your internal auditors are doing them as well.  
So, this technology actually fits very nicely into the overall corporate governance structure that I talked about earlier in the podcast.  And so, if tests can show some leadership in this space, and particularly as it relates to actually making things more accurate, making their tax determinations more accurate, they’re gonna have some great partners within the corporate function around this -- these sets of technologies.  So really enthused about them.  
MS. SCHWABENBAUER:  That’s perfect.  That’s perfect.  And I think, you know, that ties into exactly what, you know -- what we’re looking to do.  And I think, you know, having procurement be a part of that, and tax and procurement to really partner together, that’s what’s gonna make this happen.  So hopefully, we’ll, you know, be able to support your efforts, David.  We’re excited to hear what you come out with next.  We’ll have you on our next season episode here for the show.  
So that will do it for today’s show.  I’d like to thank Mike Bernard.  Mike, thanks again for coming.  
MR. BERNARD:  Thank you. 
MS. SCHWABENBAUER:  And, David Deputy, thank you for joining us. 
MR. DEPUTY:  Thank you, Kristen. 
MS. SCHWABENBAUER:  And thanks to our listeners.  Make sure to tune in for our next episode when we’ll discuss understanding the international accounting behind global indirect tax and procurement.  

Episode 1: Why is Indirect Tax in Procure-to-Pay So Critical?

Episode 2: The Differences in Tax in the Procure to Pay Process: U.S. vs. Global

Episode 3: Indirect Tax in Procurement – Landscape, Opportunities, and Challenges

Episode 4: Indirect Tax in the Procurement Landscape: Opportunities and Challenges with Global VAT

Episode 5: Industry Perspective: Integrating a Tax Engine for a Global Motor Manufacturer

Episode 6: Aligning Tax and Procurement to Streamline Business Processes

Episode 7: Key Considerations When Deploying a Tax Solution for Procurement

Episode 8: Invoicing Explained: Understanding Indirect Tax During the Procurement Process

Episode 9: Keys to a Successful Procurement Platform Implementation

Episode 10: Tax Reporting: Why Internal Audit and The Sarbanes-Oxley Act (SOX) are Essential

Episode 12: Understanding International Accounting: Global Indirect Tax and Procurement

Episode 13: Integrating Vertex with SAP Ariba: An Overview

Episode 14: Consumer Use Tax Audits: Pain Points and Solutions